Wednesday, October 26, 2011

Notes on the Vatican Statement on Global Financial Reform

UPDATE:
Thinking this post (written last night) over again in the light of morning, it strikes me that while getting a lot of the real text out there is doubtless is a real service, many people simply won't read the whole thing, so I'm adding the following summary bullets at the top. The document:

- Blames easy money and easy credit for the origins of the global financial crisis (classic Austrian business cycle explanation)
- Criticizes a "liberalist approach" to avoiding intervention and the failure to bail out Lehman Brothers (notes later that financial institutions should be bailed out on condition of contributing to the real economy through "virtuous behavior")
- Notes that globalization has been a huge benefit to many, but has left others behind
- Calls for people to remember spiritual and ethical considerations rather than putting their hope in technocracy
- Expresses concern that speculation has hurt global markets and the developing world in particular
- Praises the G7 and G20
- Suggests the need for a global "authority" stronger than the UN of IMF
- Says that such a world authority would have to be voluntary in nature, not use force or compulsion, and would probably start as an association of a smaller number of nations (like the G20 or EU)
- Expresses concern that financial markets have grown faster than "real markets"
- Endorses the idea of a world central bank
- Lists as purposes of a world authority and central bank that it would: 1) encourage free trade and efficient markets, 2) prevent excessive government deficits, 3) pursue sound money, 4) prevent speculation and excessive credit, 5) fund itself via a financial transaction tax

First, a little context: This document was written by the Vatican's Pontifical Council for Justice and Peace, an office responsible for providing thought on social justice issues. This is, thus, not something written by the pope, but it does come from people that Benedict XVI has put in charge of thinking on political and economic issues. The document itself is fairly short and less densely written than most encyclicals. Given what it covers, it seems to me that there's not really any teaching presented here, per se, but rather an attempt to summarize the understandings of certain experts about the current global economic situation, and then to apply well established Catholic moral teachings to the current world situation.

Without getting further into editorializing, I'm going to work through a number of quotes from the text while providing some notes with my own thoughts on it. I've preserved the numbered headings of the original document. (The document is in the block-quote indents, my notes are in the out-dents.)

1. Economic Development and Inequalities

In material goods markets, natural factors and productive capacity as well as labour in all of its many forms set quantitative limits by determining relationships of costs and prices which, under certain conditions, permit an efficient allocation of available resources.

This is a fairly standard observation, but as a pricing guy I found it interesting that one of the first things in the document was a note to the efficiency of price as a means of achieving efficient markets.

In monetary and financial markets, however, the dynamics are quite different. In recent decades, it was the banks that extended credit, which generated money, which in turn sought a further expansion of credit. In this way, the economic system was driven towards an inflationary spiral that inevitably encountered a limit in the risk that credit institutions could accept. They faced the ultimate danger of bankruptcy, with negative consequences for the entire economic and financial system.
...
The speculative bubble in real estate and the recent financial crisis have the very same origin in the excessive amount of money and the plethora of financial instruments globally.

This is interesting in that it is an essentially Austrian account of the sources of the financial crisis: blaming it on easy money and easy credit. As Blackadder observed a while back, this wouldn't be the first time that a Vatican official has taken an explicitly Austrian (and anti-Keynsian) stance on economic issues.)

If nothing else, this should serve as a reminder that thinking on economic issues coming out of the Vatican tends not to fit well in American political alignments. As if to emphasize this, the next interesting point comes from what to American eyes would seem very much the other side of the political spectrum:

A liberalist approach, unsympathetic towards public intervention in the markets, chose to allow an important international financial institution to fall into bankruptcy, on the assumption that this would contain the crisis and its effects. Unfortunately, this spawned a widespread lack of confidence and a sudden change in attitudes.

Here the author blames the actual start of the 2008-present global financial crisis on the failure to bail out Lehman Brothers. (There's something to this, though arguably part of the reason this was catastrophic is that Lehman appears to have expected to be saved after the way Bear Stearns kind-of was, and thus avoided some painful but possible solutions to their problems before they absolutely hit critical.)

This endorsement of bailing out Lehman is probably unlikely to be palatable to either the populist right or the populist left, but it's certainly an arguable claim from an establishment perspective.

Turning to the more general world scene:

Global economic well-being, traditionally measured by national income and also by levels of capacities, grew during the second half of the twentieth century, to an extent and with a speed never experienced in the history of humankind.

But the inequalities within and between various countries have also grown significantly. While some of the more industrialized and developed countries and economic zones – the ones that are most industrialized and developed – have seen their income grow considerably, other countries have in fact been excluded from the overall improvement of the economy and their situation has even worsened.
...
Nonetheless, it should be reiterated that the process of globalisation with its positive aspects is at the root of the world economy's great development in the twentieth century. It is worth recalling that between 1900 and 2000 the world population increased almost fourfold and the wealth produced worldwide grew much more rapidly, resulting in a significant rise of average per capita income. At the same time, however, the distribution of wealth did not become fairer but in many cases worsened.

This is one of those passages you can probably expect left leaning Catholics to attempt to throw at right-leaning Catholics for some time. There's a strong belief in some sectors that if developed countries are more wealthy than undeveloped ones, that's because they somehow "stole" their money from the undeveloped ones. I'm not at all clear that this is the only way that the above passage can be interpreted -- especially given that this is still obviously a rough translation that hasn't even been fully spell-checked. But I imagine that, regardless of the intent of the authors, we can expect to see phrases like "other countries have in fact been excluded from the overall improvement of the economy" again.

What has driven the world in such a problematic direction for its economy and also for peace?

First and foremost, an economic liberalism that spurns rules and controls. Economic liberalism is a theoretical system of thought, a form of “economic apriorism” that purports to derive laws for how markets function from theory, these being laws of capitalistic development, while exaggerating certain aspects of markets. An economic system of thought that sets down a priori the laws of market functioning and economic development, without measuring them against reality, runs the risk of becoming an instrument subordinated to the interests of the countries that effectively enjoy a position of economic and financial advantage.

On the one hand, this section seems to endorse the idea that classical liberalism (free markets, free societies, etc.) don't necessarily work all that well -- however I think the second half is perhaps of greatest importance, where it's stated that no system can be taken as self-validating, as not requiring any kind of verification from the real world. When people accept ideological conclusions without caring whether they actually pertain to how things work, there's invariably trouble. This is the case whether one is talking about the planned economies of the left (that somehow never work as advertised) or the theoretical libertarian utopias of Ayn Rand and her acolytes. (The difference is that I would tend to see planned economies as having been tried more times than Rand's ideas.)

In his social encyclical, Benedict XVI precisely identified the roots of a crisis that is not only economic and financial but above all moral in nature. In fact, as the Pontiff notes, to function correctly the economy needs ethics; and not just of any kind but one that is people-centred. He goes on to denounce the role played by utilitarianism and individualism and the responsibilities of those who have adopted and promoted them as the parameters for the optimal behaviour of all economic and political agents who operate and interact in the social context. But Benedict XVI also identifies and denounces a new ideology, that of “technocracy”.

Again, there's probably material here to make just about everyone at least a bit uncomfortable. I'm willing to bet that the author considers at least some of what I would consider sensible market-drive ideas to be "utilitarian" or examples of "individualism" -- though I would disagree. At the same time, a "technocracy" (and a somewhat utilitarian one) is precisely what many in the current progressive establishment have been pushing for. Obama was, after all, supposed to be the technocrat who would save everyone, the man who would be competence to the White House. (How's that working for ya'll...?)

2. The Role of Technology and the Ethical Challenge

However, to interpret the current new social question lucidly, we must avoid the error – itself a product of neo-liberal thinking – that would consider all the problems that need tackling to be exclusively of a technical nature. In such a guise, they evade the needed discernment and ethical evaluation. In this context Benedict XVI's encyclical warns about the dangers of the technocracy ideology: that is, of making technology absolute, which “tends to prevent people from recognizing anything that cannot be explained in terms of matter alone” and minimizing the value of the choices made by the concrete human individual who works in the economic-financial system by reducing them to mere technical variables. Being closed to a “beyond” in the sense of something more than technology, not only makes it impossible to find adequate solutions to the problems, but it impoverishes the principal victims of the crisis more and more from the material standpoint.

This is precisely the kind of double-edged insight which I think it's useful to find in this kind of document. Properly understood, it underscore the hollow core both of consumerism and of the "where's my bail out?" supporters of a cradle to grave welfare state. For all that collectivist societies are supposed to be more "caring", it is hardly a coincidence that it is in the most comprehensive welfare states, in northern Europe, that we see the most total breakdown of the family and of traditional belief. A view of human society which looks only to the filling of material wants, whether through consumerist markets or the nanny state, is a tragically self centered and incomplete view.

3. An Authority over Globalization

On the way to building a more fraternal and just human family and, even before that, a new humanism open to transcendence, Blessed John XXIII’s teaching seems especially timely. In the prophetic Encyclical Pacem in Terris of 1963, he observed that the world was heading towards ever greater unification. He then acknowledged the fact that a correspondence was lacking in the human community between the political organization “on a world level and the objective needs of the universal common good”. He also expressed the hope that one day “a true world political authority” would be created.

This is true. It seems to me that the record of history is that this is not very practical, but just as it was important in the 19th century for faithful Catholics who believed the benefits of a free and democratic society to recognize that the Church authorities generally favored (rightly or wrongly) the old world of throne and altar, it is important now for Catholics (like myself) skeptical of the idea of a world political authority to recognize that the last several popes have expressed great hopes for the UN and for an eventual authority of similar scope with "more teeth". We'll shortly get to what I think are some of the inherent contradictions of this desire given those same pope's views on political domination and war.

The purpose of the public authority, as John XXIII recalled in Pacem in Terris, is first and foremost to serve the common good. Therefore, it should be endowed with structures and adequate, effective mechanisms equal to its mission and the expectations placed in it. This is especially true in a globalized world which makes individuals and peoples increasingly interconnected and interdependent, but which also reveals the existence of monetary and financial markets of a predominantly speculative sort that are harmful for the real economy, especially of the weaker countries. [emphasis added]

This certainly represents a certain conventional wisdom, but as a matter of actual fact I'm not clear on the extent to which "speculation" actually drives up the costs of real products needed by developing countries. After all, speculators are speculating on what the future balance of supply and demand will be. If they're wrong, they lose money. If they're right, they simply cause prices to adjust slightly sooner than they otherwise would.

In the short term there could be a very real problem here. If a speculative bubble on a commodity causes prices to rise in the short term, and a buyer is short enough on supply he has to buy during the bubble rather than waiting for it to pop, it doesn't do him any good that the bubble pops later.

However, speculation (and sheer volume of trading) can also help to smooth out prices by passing around more information. And much of the worst poverty is caused either by political forces (using hunger as a weapon) or in those areas of the world where people are still living in subsistence economies rather than buying food and other essentials that pass through the global commodity markets.

This is all rather abstruse wonkery, perhaps mostly of interest only to people (like me) with an excessive interest in pricing, but it seems to me that there are two sides to this question.

This is a complex and delicate process. A supranational Authority of this kind should have a realistic structure and be set up gradually. It should be favourable to the existence of efficient and effective monetary and financial systems; that is, free and stable markets overseen by a suitable legal framework, well-functioning in support of sustainable development and social progress of all, and inspired by the values of charity and truth.

Once again, this is the sort of thing that both sides will find things to dislike. Many on the left have hopes for an overturning of "the nation state" as a means of power. However, many of those same people hope to move "beyond capitalism". For instance, earlier this year we had the specter of Terry Eagleton writing in Commonweal under the title "Was Marx Right" about how, among other things, we should abandon markets for a more "democratic" way of distributing resources. And yet, here we have the authors of this document endorsing a "supranational Authority" with the express purpose of providing "free and stable markets overseen by a suitable legal framework". Clearly, that's not something which those who consider Cuba to be a leading example to the world are going to endorse. At the same time, those who have (as recent events would perhaps suggest, rightly) questioned the efficacy of organizations such as the European Union and its central bank are going to be deeply skeptical of an even larger bureaucratic organization, even if it is supposed to foster free markets.

There are also the practical questions:

It is a matter of an Authority with a global reach that cannot be imposed by force, coercion or violence, but should be the outcome of a free and shared agreement and a reflection of the permanent and historic needs of the world common good . It ought to arise from a process of progressive maturation of consciences and freedoms as well as the awareness of growing responsibilities.

This all sounds very good, but it doesn't seem to tie very well with human experience. Authorities which aren't imposed with "force, coercion or violence" don't tend to be able to impose restrictions on the people who are most bent on misbehaving. And it's not clear that there has been much "progressive maturation of consciences" since the days when they were throwing jaw bones at each other.

Perhaps the author sees this as rather speculative as he goes on:

Consequently, reciprocal trust, autonomy and participation cannot be overlooked as if they were superfluous elements. The consent should involve an ever greater number of countries that adhere with conviction, through a sincere dialogue that values the minority opinions rather than marginalizing them.

So it seems to be assumed that this would start out as some sort of smaller group of countries with a common economic and political authority, and that others would join as (and if) they saw it to be working.

Though again, color me skeptical as to the likelihood that any organization can operate that "values the minority opinions rather than marginalizing them". I mean, for goodness sake, we have Occupy Wall Street (that supposed ultimate example of bottom up governance) apparently at the breaking point over whether playing the drums all day is a good idea.

A supranational Institution, the expression of a “community of nations”, will not last long, however, if the countries’ diversities from the standpoint of cultures, material and immaterial resources and historic and geographic conditions, are not recognized and fully respected. The lack of a convinced consensus, nourished by an unceasing moral communion on the part of the world community, would also reduce the effectiveness of such an Authority.

This seems to very nearly admit the impracticality of the idea. Come to that, would one need an Authority if there was "an unceasing moral communion on the part of the world community"?

Likewise, governments should not serve the world Authority unconditionally. Instead, it is the world Authority that should put itself at the service of the various member countries, according to the principle of subsidiarity. Among the ways it should do this is by creating the socio-economic, political and legal conditions essential for the existence of markets that are efficient and efficacious because they are not over-protected by paternalistic national policies and not weakened by systematic deficits in public finances and of the gross national products – indeed, such policies and deficits actually hamper the markets themselves in operating in a world context as open and competitive institutions.

Having just shown a fair amount of cynicism over the chances of the kind of Authority described coming together, there's now a surprise for our left-leaning friends: One of the primary ways that the World Authority will serve governments is by encouraging them to avoid deficit spending and remove barriers to free trade.

Again, this is why a "this is a far left document" meme is way off. There's much in here that American conservatives and libertarians are not going to like, but there's just as much that leftist Catholics (particularly populist ones) aren't going to like either (if they read it.)

As we read in Caritas in Veritate, “The governance of globalization must be marked by subsidiarity, articulated into several layers and involving different levels that can work together.” Only in this way can the danger of a central Authority’s bureaucratic isolation be avoided, which would otherwise risk being delegitimized by an excessive distance from the realities on which it is based and easily fall prey to paternalistic, technocratic or hegemonic temptations.

The elephant in the living room in all this is that what's being described here sounds a lot like the EU and ECB, which seems to be in the process of tearing the European currency zone to pieces (and causing an awful lot of fear and rioting in the meantime.) I can't help wondering if the above is an attempt to distance what is being described from what people have seen of the operation out of Brussels.

4. Towards Reforming the International Financial and Monetary Systems in a way that Responds to the Needs of all Peoples

The second factor is the need for a minimum, shared body of rules to manage the global financial market which has grown much more rapidly than the real economy. This situation of rapid, uneven growth has come about, on the one hand, because of the overall abrogation of controls on capital movements and the tendency to deregulate banking and financial activities; and on the other, because of advances in financial technology, due largely to information technology.

This is one of those pieces of conventional wisdom that I've always been a little curious at to the truth of. Is it accurate to say that financial markets actually grow faster than the real market? Or is it just that some products are overvalued relative to others? How would you measure the value or "real" markets in terms of something other than the financial markets the denominate them?

I've noticed one or two gold bug-type Austrians or traditionalists saying some positive things about this document, and I can't help wondering if this (along with the condemnation of easy money) is part of the motivation there. I don't really have a critique, I'm just not exactly sure how one can assert what's being asserted here with surety.

Specific attention should be paid to the reform of the international monetary system and, in particular, the commitment to create some form of global monetary management....

In fact, one can see an emerging requirement for a body that will carry out the functions of a kind of “central world bank” that regulates the flow and system of monetary exchanges similar to the national central banks.

Without having read the pieces, I gather from the links being thrown around on Facebook that there's been a certain amount of controversy as to whether the document endorses a central world bank. It seems to me that the above sections make fairly clear that it does.

The endorsement is fairly vague. It's not stated what exactly the bank would be doing to manage the global monetary system. One assumes something other than the way that the relatively affluent members of the Eurozone are currently putting the thumbscrews on the relatively poor members via their shared bank.

Given the news at the moment, I would have to think that it's relatively hard to make a good case for a global equivalent to the European Central Bank -- from virtually any political point of view -- but there are those who have a lot invested in the idea that a group of well meaning people could achieve a lot with such an institution, and I can only assume that the authors fall into that camp.

---

On the regional level, this process could begin by strengthening the existing institutions, such as the European Central Bank. However, this would require not only a reflection on the economic and financial level, but also and first of all on the political level, so as to create the set of public institutions that will guarantee the unity and consistency of the common decisions.
...
In this process, the primacy of the spiritual and of ethics needs to be restored and, with them, the primacy of politics – which is responsible for the common good – over the economy and finance. These latter need to be brought back within the boundaries of their real vocation and function, including their social function, in consideration of their obvious responsibilities to society, in order to nourish markets and financial institutions which are really at the service of the person, which are capable of responding to the needs of the common good and universal brotherhood, and which transcend all forms of economist stagnation and performative mercantilism.

I honestly hope that I'm wrong or over-simplifying here, but this strikes me as an example of how Catholic thought (both in it's modern social-democratic form and in its old throne and altar form) has historically not dealt much with the idea that there may be lack of consensus (honest lack of consensus) among well meaning individuals as to what "the good" is, in relation to some particular situation.

I am absolutely in agreement that the primacy of the spiritual and of ethics needs to be restored in the interest of the common good. However, I'm not necessarily optimistic about the ability of politics to achieve this. (Not that I'm any more optimistic about the financial sphere achieving this either.) Given that even faithful Catholics have trouble agreeing on how to practically run even very small institutions in such a way as to foster the common good, I don't see how large states full of moneyed interests and disparate belief systems can be expected to achieve such an agreement.

On the basis of this sort of ethical approach, it seems advisable to reflect, for example, on:a) taxation measures on financial transactions through fair but modulated rates with charges proportionate to the complexity of the operations, especially those made on the “secondary” market.
...
b) forms of recapitalization of banks with public funds making the support conditional on “virtuous” behaviours aimed at developing the “real economy” ;

Again, this is an area where the authors seem to align clearly with some of the same proposals often put forward by American leftists. The idea of having some sort of financial transaction tax is fairly popular right now, on the theory that this would hit high-frequency traders hard. Personally, I'm not sure this would necessarily do much other than have people pursue other trading tactics -- I don't think it would reduce speculation or keep prices more stable.

On recapitalizing banks with public funds but with the condition of virtuous behaviors that develop the real economy: This seems to assume that there are lots of virtuous behaviors that banks could be engaging in right now to grow the real economy but some reason aren't. I'm not necessarily convinced that's the case. (Or that, if it is, there's much agreement of what those behaviors are that they need to go do.) Generally speaking, it seems like the track record is that in most of these situations either the bankers end up running the show and increasing their power, or rabble-rousing populists end up running the show and increasing their power. Unless one is sure that one of these two is conducive to the common good -- which I'm not.

Conclusions

In a world on its way to rapid globalization, the reference to a world Authority becomes the only horizon compatible with the new realities of our time and the needs of humankind. However, it should not be forgotten that this development, given wounded human nature, will not come about without anguish and suffering.

Well, the document ends on a note of caution, and so I do, I guess.

I understand the motivation of the Vatican to try to provide guidance into issues like "what the G20 should do", but I can't help thinking that for most Catholics it would be far more helpful to get guidance as to what the other 99.9 percent of us should do -- though in a sense that hasn't changed at all since Christ's words in the gospels so there's no need. Also, I think that when Church officials try to provide very concrete advice on issues of public policies such as these, it tends to underscore the doubts and divisions that exist within well-meaning and faithful Catholics. And perhaps also the limitations of the knowledge and experience of those trying to provide the advice.

By bringing so many quotes to the fore, I hope I've at least provided a fairly clear picture of what is in this document.

2 comments:

I appreciate the commission for at least bringing this up for discussion. As always 'the devil's in the details' as you point out.

It's inevitable that some attempt is going to be made to set rules at an international level. Even U.S. regulators and policymakers are exasperated at money-sloshing here and there with high leverage. If we want to play our own game across world boundaries we need some form of foul lines, rulebook and referees that all can respect.

Even bankers cry that they make many of the moves they make 'because others do' just to stay in the game.

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